1. Chapter 3: Government Intervention

2. Market Intervention Price Ceiling Price Floor
An imposed maximum allowable price of a good and service; e.g., rent control
Price Floor
An imposed minimum allowable price of a good and service; e.g., minimum wage

3. Rent Control Policy
Set the rent at a price above the market price to support low income families
Rent control create a shortage and develops conditions for a black market
Rent control also contributes to the deterioration of low income housing as building owners would not want to maintain these units

4. Effect of Rent Control Policy
r=Market rent
r2=Controlled rent
r1=Black market rent
Rent D S r1
Shortage=h1h2 r r2 D S h1 h h2
No. of rental units

5. Rent Control & Increased Demand
An increase in the demand of housing will result in a higher rent
Higher rent induces the supply of housing as builders find it more profitable to invest
If rent in this market were controlled, the increase in supply would not happen; it would rather cause a larger shortage

6. Effect of Rent Control D’ Rent D S S’ r1 Shortage=hh3 r2 r D’ S’ D S
Quantity

7. Minimum Wage Law Purpose
Improve the wage paid to unskilled labor in order to improve their living conditions
Trend from 1980 to 2000
Increased from $3.10 to $5.15
Decreased from 47% of the average earnings to 37%
Reduced from 98% of the poverty level to 79%

8. Demand for Labor
Labor resources firms are willing and able to employ at various wages
Determinates of labor demand:
Price of the product
Labor productivity
Marginal Revenue Product =
Product Price * Marginal Product of Labor

9. Market Demand for Labor
Wage A W1 B W2
D=MRP E1 E2
Employment

10. Supply of Labor
Labor resources workers are willing and able to sell at various wages
Substitution effect: change in hours of work in response to a wage change (positive)
Income effect: change in hours of work in response to an income change (usually negative)

11. Market Supply of Labor Wage S B W2 W1 A S E1 E2 Employment
Positive Sub. Effect > Negative Income Effect
Wage S B W2 W1 A S E1 E2
Employment

12. Labor Market Equilibrium
Wage D S A W
Demand=Supply D S
Employment E

13. Effect of Minimum Wage S Wage D 6.00 5.00 D S 8 9 9.25 Employment
Unemployment=AB=1.25 A
6.00 B
5.00 D S 8 9
9.25
Employment

14. Effect of Minimum Wage Alternative AnalysisD
Wage
Minimum wage results in no unemployment
As long as it remains in the intermediate range
6.00
5.00 D S 8 9
Employment